HealthSouth Network Feels Fallout of Investigation

The physical therapists working for HealthSouth Corp. took good care of Eric Hollins after he banged up his knee three years ago playing Ultimate Frisbee.

But the Georgia Tech senior says the fraud allegations flowing out of HealthSouth's headquarters in Birmingham might keep him from going back if he gets hurt again, no matter how much he liked the care in Atlanta.

"I would definitely think twice about it," Hollins said. "All of these corporate scandals have made me think about whether I want to do business with a company that has these kinds of problems."

HealthSouth patients and physicians alike are getting skittish as the rehabilitation chain deals with a ballooning criminal probe into an alleged accounting fraud. The investigation has been mostly confined to corporate headquarters, but the fallout is spreading to HealthSouth's network of rehab hospitals and clinics. There are 50 in Georgia.

"Some of my patients have called the [HealthSouth] surgery center to make sure their procedures were still going to happen," said Dr. Arnold Weil, who owns Non-Surgical Orthopaedic & Spine Center, a private practice based in Marietta.

Like many physicians and surgeons around the country, Weil refers patients to HealthSouth for physical therapy or other follow-up treatments. The accounting scandal, some say, has not cut into patient care yet.

"I'm not changing my referrals. It's still business as usual as long as HealthSouth keeps up staffing and supplies," Weil said. "But long-term, I don't know how this whole situation is going to work out."

HealthSouth's corporate checkbook has fallen into a black hole amid revelations by former finance chiefs that they'd been concocting bogus financial records for years. The scale of the alleged $2.5 billion fraud seems to grow bigger by the day.

This week, the case took a dramatic spin, with prosecutors Thursday rolling out secret tape recordings of suspects at HealthSouth headquarters.

At the center of the scandal is ousted Chairman and Chief Executive Richard Scrushy, who founded HealthSouth as the first one-stop shop for rehabilitiation in the early 1980s. Scrushy, 50, is accused of orchestrating a massive accounting fraud in order to prop up the company's stock price.

The Securities and Exchange Commission has charged Scrushy in a civil lawsuit with accounting fraud and insider trading. Criminal charges are still pending. HealthSouth has fired Scrushy, who denies the allegations.

Meanwhile, HealthSouth is dealing with a financial crisis as it tries to fend off bankruptcy.

Touchy situation

Analysts say the company will likely be forced to sell pieces of its business for the cash to survive. A breakup inside the company is already in the works as some of HealthSouth's physician partners try to part ways with their troubled affiliate. Some doctors are removing HealthSouth's name from their offices and are looking at other partners.

The situation has gotten so touchy that HealthSouth sent letters to patients saying that services are still intact. The company also promised suppliers they'll get paid for implants, orthopaedic braces and other necessities, but some vendors have started demanding cash-on-delivery.

The vulnerability marks a comedown for a company considered a powerhouse in health care.

Scrushy, a respiratory therapist by training, launched HealthSouth in 1984 with a notion to take it big from the start. With national brand names dominating so many other types of businesses, Scrushy planned to brand rehabiliation care, too.

HealthSouth would be a different breed of health care physical therapy would move from hospital basements into a chain of facilities staffed with physicians and therapists who could treat just about any kind of patient, from the weekend warrior with tennis elbow to the factory worker with a bad back.

The timing was right in the 1980s. With an aging population and a new market for Medicare reimbursement, HealthSouth was the medical version of a fast-food franchise, blanketing the country with convenient locations and a promise of lower-cost care.

Within 10 years, HealthSouth had cornered the for-profit rehab market. Its huge referral network linked inpatient hospitals with its outpatient diagnostic and occupational health centers. HealthSouth also jumped into inpatient care with its own acute-care hospitals and surgery centers.

A flashy image

HealthSouth leaned on a flashy image in sports medicine as its calling card. Its facility in Birmingham, for example, is known all over the world for treating celebrities ranging from basketball legend Michael Jordan to actress Jane Fonda.

HealthSouth says it gets many of its patients through contracts with insurers and employers such as Wal-Mart and Anheuser-Busch. HealthSouth also strikes service deals in which it provides training on ergonomics and injury prevention.

HealthSouth's expanding business has been on ice since the fraud investigation ramped up last month. Construction crews have stopped working on several HealthSouth projects, including its flagship "digital hospital" in Birmingham, because they're not sure they'll get paid.

In Phenix City, Ala., near the Georgia border, workers halted a joint venture between HealthSouth and Columbus Regional Healthcare System. The 38-bed rehabilitation hospital was three-quarters complete and in big demand.

"The closest rehab facility is in Montgomery, and they're 100 percent occupied with a long waiting list," said Larry Sanders, chairman and CEO of Columbus Regional, a nonprofit hospital. "We'd like to be able to take [HealthSouth] out of the project and take it to completion ourselves at this point, but we don't know if that's a possibility."

Across the country, HealthSouth has a number of joint ventures with hospitals, and some of its outpatient surgery centers are partly owned by physicians. The scandal, and the company's uncertain future, has put those affiliates in an awkward situation.

"It's not a good position to be in, especially for the community hospitals," said Frances Fowler, president of Fowler Healthcare Affiliates, an Atlanta-based consulting firm. "Anybody who was thinking of signing on would probably pull out now."

In another aspect of the scandal, federal officials are investigating whether executives at HealthSouth used the alleged accounting scheme as a means of cheating Medicare out of tens of millions of dollars.

Medicare inspectors recently said they've been investigating HealthSouth for several years. Last year, the company was under fire for improperly billing the government for one-on-one treatment when patients were allegedly treated in large groups instead.

The investigation raises doubts about the true performance of HealthSouth's medical facilities, where Medicare and insurance reimbursement filings originate. Medicare accounts for just under a third of the company's revenue, according to company filings, but the company's financial reports have been deemed unreliable in recent weeks.

"Within the industry, HealthSouth has always been respected. There was never a question that they were skimping on health care," said Russ Coile, editor of Russ Coile's Health Trends newsletter. "Now we don't really know how well its business has been doing because we don't know if any of their numbers can be trusted."

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